In January 2019, we hosted a webinar in association with Accuity on overcoming anti-money laundering (AML) challenges for law firms.
Viewers asked us some interesting questions and our answers are below.
The webinar is free for members to access via the Professional Development Centre.
When it comes to checking bank statements from an identifiable client, what is considered good practice in terms of the length of time when investigating accumulated wealth or source of funds?
There is no prescriptive rule on how ‘far back’ you should look when investigating source of wealth or source of funds.
If the matter carries a standard level of risk with no reason to be suspicious then three to six months may be sufficient, but the time frame should be dictated by what you and your firm consider to be appropriate.
If the client tells you that the source of funds is from a particular event, such as an inheritance or the sale of an asset, then you should ask to see the statement which shows the receipt of the funds into the account.
For further guidance, refer to the Law Society’s guidance on identifying the source of funds.
Where do you ask for and record the answer to the source of funds question? On the AML dashboard or on the file? If the latter, how do you keep a central overview of it?
You can record the answer either centrally or on the file.
At the file opening stage, you may not have all the information about source of funds, so the fee earner may record the information obtained on the file itself.
The fee earners have the primary obligation to conduct ongoing monitoring of the source of funds. Any receipts into your client account should be subject to this.
When the money reaches your client account, it is useful to ask your fee earner to complete a short checklist to confirm that CDD and source of funds checks have been carried out and to identify any third-party payments so that further diligence can be undertaken if necessary.
For further guidance, see the Law Society’s guidance on identifying the source of funds.
When monies are received into a pooled client account, we are not able to see the originating bank account. How can we know that the monies received have been paid from the account that we have conducted due diligence on and not a different account? Is there any way to include the originating account details?
For CHAPS and international payments accounts, the name of the account, the account number and the details of the originating bank are usually visible.
For BACS payments, the name of the account and sometimes the account number are usually visible.
This means that the name of the originating account is usually the minimum known information.
If you have cause for concern, the bank holding the account should be able to confirm other, missing, information.
What do you do when the client refuses to give you certain documents but the lawyer in charge still wants you to proceed with the job?
Your actions will depend on whether the client’s refusal is reasonable.
You may wish to discuss with the lawyer and the client the provision of alternative documents that would still satisfy the requirements of Regulation 28 of the Money Laundering, Terrorist Finance and Transfer of Funds (Information on the Payer) Regulations 2017 (the Regulations).
Regulation 31 states that if you are unable to apply CDD in accordance with Regulation 28 then you must not establish the business relationship or carry out the transaction and you should also consider whether you are required to make a suspicious activity report (SAR).
Therefore, if you cannot agree on satisfactory alternative documentation that would comply with Regulation 28, you must not proceed with the job and should consider whether you need to submit a SAR.
For further information, see page 38 of the anti-money laundering guidance for the legal sector.
Are we able to take money on account of costs before we have received proof of ID and therefore before due diligence is complete?
HMT has confirmed that a payment on account of costs to a legal professional or payment of a legal professional’s bill would not be viewed as participating in a financial transaction and therefore is not within the scope of the Regulations.
However, this should be viewed with some caution and it is prudent to undertake CDD first.
You want to be sure that you are not dealing with a sanctioned person or someone who is going to damage your reputation before you accept any money.
While taking money on account for a search fee which is paid straight out to the local authority is low risk, accepting a significant sum on account of costs carries higher risks.
If the client demands a refund and you have not conducted CDD, you may have to consider whether you are suspicious and discuss the matter with your MLRO, who may need to make a defence against money laundering (DAML) SAR to obtain a defence to money laundering before you can repay the funds.
What practical checks can be done on immigration clients with no ID or bank statements (for example, someone entering the UK under asylum or who has entered clandestinely)?
The anti-money laundering guidance for the legal sector has advice on the situation where clients are unable to provide standard documentation - see page 54.
If you decide that the client has a good reason for not meeting the requirements then you can accept other information, such as a letter from someone who knows them, a Home Office letter or travel document, an asylum seeker registration card or letter from a GP, hostel staff or religious leader.
We mainly deal with equity release for our clients. The intended purpose of the relationship is self-explanatory; however, would you go as far as to determine the need for the funds (such as home improvements)?
Identifying the purpose behind the equity release is not required under the Regulations.
However, it is good practice to obtain this information to make sure that the client (especially if elderly or vulnerable) is not subject to any duress or undue influence to release money, and in case this information is required by the lender.
For further guidance, refer to the Law Society’s practice note on meeting the needs of vulnerable clients.
How can you verify the address of a client who lives abroad? Are there directories that can be used that list what the usual identity documents are for a country in relation to utility bills or proof of address documents?
You should follow the same procedure as you would for a UK national client.
Ask to see a document that has been issued by a government agency, court or local authority, or you could ask to see a document from a regulated financial services agency. Some passports - for example, the Republic of France - include a residential address.
You should also be reasonably satisfied that the documents in another language do in fact show the address.
Don’t forget that if the individual is a foreign professional, you can consult the directory produced and maintained by the professional body.
See section 4.9.1 of the anti-money laundering guidance for the legal sector and sections 5.3.73 – 5.3.78 of the Joint Money Laundering Steering Group guidance for more detail.
What is your advice to firms who wish to pass on the cost of an electronic ID search?
The 2016 SRA report states that:
"In relation to regulated activity and in accordance with the Money Laundering Regulations, law firms are legally required to undertake Client Due Diligence (CDD). It is our view that the cost of undertaking CDD cannot therefore be treated as a disbursement, since it is not a cost incurred on behalf of the client.
“… As a general rule, we would expect such charges to form part of a firm’s overheads. There may on occasion be circumstances in which the cost of the CDD is particularly high (for example, when you have to carry out an overseas company search) and firms may wish to seek agreement with their client that the cost will be payable by the client.
“In order to comply with Outcomes (1 12) and (1.13) firms should explain the likely cost with their client and obtain their client’s informed consent at the outset of the retainer. If the client agrees to meet the cost of the CDD then firms should record it in their bill as part of profit costs. Some firms undertake CDD for all clients as a matter of course, irrespective of the nature of the retainer and whether it is a requirement of the MLRs.
“Whilst there may be good reasons for doing this, it is questionable as to whether there would ever be justification for passing the cost on to the client where such checks are not a requirement, even if the client agrees.”
Is the firm-wide risk assessment an annual requirement?
No, the firm-wide risk assessment is not an annual requirement.
However, your risk assessment is a live document, which means that it should be regularly reviewed to ensure it is up-to-date and takes into account:
- any changes to the size and nature of your firm’s business including, for example, changes to your client base or the services your firm provides
- legislative changes
- new case law
- any changes to the UK National Risk Assessment, the EU Supranational Risk Assessment or the SRA’s Sector-wide Risk Assessment, and
- updates to guidance such as the Legal Sector AML Guidance or the FATF Risk Based Approach Guidance for Legal Professionals.
You are also required under Regulation 19(1)(b) and (c) to regularly review and update your anti-money laundering policies, controls and procedures (PCPs) and to maintain records relating to those updates.
As your PCPs must address the risks identified in your firm-wide risk assessment you should review and update your firm-wide risk assessment as part of this process.
For further information, refer to Chapter 2 of the anti-money laundering guidance for the legal sector.
The SRA risk assessment identifies conveyancing as being high risk. It seems like this means that each firm should categorise conveyancing as high risk in its firm risk assessment and fee earners should assess each conveyancing matter as high risk, but it is hard to believe that we should have to apply enhanced due diligence to every conveyancing matter. How do you advise that a firm resolves this?
It is not the case that all conveyancing transactions will automatically trigger enhanced due diligence.
Your firm-wide risk assessment and policies, controls and procedures will help you identify the factors that may trigger standard or enhanced due diligence on the specific client and matter.
This may include situations where the geographical location of the client or property, the delivery channel or the client themselves are high risk, or where the value and nature and purpose of the business or transaction you are being asked to deal with are a cause for concern.
In assessing the client and the matter, you must take account of the factors set out in Regulation 33(6).
See Chapter 2 of the anti-money laundering guidance for the legal sector for further information on potential triggers for enhanced due diligence.
If, taking into account all potential indicators of high risk, you consider that the conveyancing matter you are dealing with is low risk, you may choose to conduct standard due diligence to satisfy your obligations.
However, should you assess a conveyancing matter as high risk, for example it involves funds from a high risk third country or your primary is a PEP or a known close associate, you would need to conduct enhanced due diligence.